Power Grid: Capex interrupted

Even while the rest of the market has seen a strong rally, the Power Grid Corporation stock has been an underperformer, gaining just about 17 per cent since April this year. Without doubt, the company will be one of the main beneficiaries of the growth in generation capacity in the country.

However, analysts observe there could be delays in generation capacity being set up — especially relating to the ultra mega power projects. As a result, Power Grid may not be able to make the kind of capital expenditure it has envisaged. In fact, the company is expected to miss its capital expenditure target of Rs 55,000 crore for the eleventh plan period, having spent around 14,800 crore in the first two years on strengthening its network.

If it does initiate all the planned projects, the cash flows generated may not be sufficient to fund them all, assuming projects are structured with a debt-equity ratio of 70:30. Although, the company has cash resources of around Rs 3,200 crore, it may need to dilute its equity base to raise around Rs 1,800 crore. The company’s net profit rose to Rs 1,690 crore in 2008-09, up 17 per cent year-on-year on an increase in revenues (adjusted for exceptionals) of 30 per cent.

In the current year, the company is expected to post revenues of approximately Rs 7,500 crore and a net profit of close to Rs 1,900 crore. While the growth in earnings should be stable, the company’s return on equity (RoE) is unlikely to rise beyond 13 per cent. That’s the reason why the stock appears to be somewhat expensive at just under 21 times estimated 2010-11 earnings and 2.6 times price to book.